Daily Management Review

The 5 biggest misconceptions in the oil market


Companies operating in the Permian basin in the US showed good results in August. This is not surprising, given the fact that this pool, located in Texas and New Mexico, is one of the best oil fields, according to American experts.

Bobak Ha'Eri
Bobak Ha'Eri
However, there were also negative components, such as delays in commissioning wells, inflated costs, and others.

In general, experts note that energy is not the best sector for the placement of assets this year. While investors are making a profit in other sectors, the S&P index of energy companies has fallen by more than 13%.

On the other hand, this creates certain volatility in the market, which allows making profitable deals in the long term, and investing in companies that will grow with rising oil prices.

Some experts believe that oil prices will rise in the next few years. This can be explained by the fact that the volume of reserves is decreasing due to the delay in the implementation of a number of projects and the reduction of natural gas production, despite the fact that demand is growing. Analysts predict that in 2018 the average price of oil will reach $ 65 per barrel, and more optimistic forecasts indicate that by the end of the decade oil prices will reach $ 60-70 per barrel.

However, investors often do not believe these forecasts, instead turning a number of myths that have developed around energy and oil prices. Here are some of them.

1. US stocks are "very high"

Investors are paying too much attention to US stocks. Experts believe that they do not deserve this, as they make up only a quarter of the world's reserves. At the same time, production in the US has grown by 80% over the past 6 years, analysts say. It is therefore natural that the US distribution system needs more tanks and pipelines to bring oil to the market. According to the latest data, reserves amount to about 475 million barrels.

2. US oil shale "will flood the market"

Investors are worried about excessive shale mining, as the cost of profitable mining is about $ 35-40 per barrel. These are rather superficial estimates, since they do not include factors such as non-production costs and interest payments. And these costs are also important. If you include these figures in the calculation, it turns out that quite a few US companies can make a profit at a price below $ 50 per barrel, experts say.

Sooner or later it will become clear to everyone, and production at a price of $ 35-40 per barrel will be recognized as a myth. At the same time, large international companies are cutting financing for long-term projects beginning in 2014, when oil prices plummeted. 

3. Electric cars will kill the demand for oil

While the cost of solar and wind energy has not decreased and we do not have batteries to power the network from these sources at night or during peak loads, it's better to call things by their own names.

Electric cars are the same cars that run on coal and natural gas, because the electricity they eat comes from these sources of energy. And as long as things are going this way, electric cars will continue to have a positive impact on the position of energy companies. Further, all electric vehicles sold in the period from 2012 to 2020, will reduce the demand for oil by only 270 thousand barrels per day. This is only 0.25% of the expected demand for oil in 2020, experts say.

In addition, factors such as population growth and the growth of the middle class in developed countries mean that demand for cars will grow over the next decades. Therefore, even if electric vehicles become popular, there will still be a lot of traditional cars on the roads.

4. Peak of demand for oil is approaching

This myth was popular last year, but due to the high growth of the world population and economy, the peak is unlikely to be achieved in the coming years. Experts believe that the peak demand for oil will be achieved no earlier than 2030.

5. Nigeria and Libya will return to the market with huge supplies

It's true. But both countries are in a situation of internal political conflicts and civil war. Therefore, the constant tides and outflows of oil from these countries to the market mean that at some point the supply will decline once again. Given the difficulties faced by these countries, it is likely that foreign investment will be very low here.

source: marketwatch.com